On September 30, 2022, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued its highly anticipated Final Rule establishing a beneficial ownership information (BOI) reporting requirement under the Corporate Transparency Act (CTA)  of 2019.  These rules significantly change the obligations of business entities to disclose previously private information regarding the ownership and control of these entities.  The primary purpose of the CTA, enacted as part of the Anti-Money Laundering Act of 2020 is to protect the US financial system from being used for illicit purposes, including preventing corrupt actors, terrorists, and criminals from hiding assets in anonymous shell companies. Background for this rule was addressed in prior blog posts including The Corporate Transparancy Act  (1/31/22) and FinCEN and Real Estate (8/2/22).

The Final Rule[1]

The Final Rule incorporates public comments to the Notice of Proposed Rulemaking published in December 2021 and becomes effective on January 1, 2024.  Reporting companies created or registered prior to this date have until January 1, 2025, to file their initial reports.  Reporting companies created or registered on or after January 1, 2024, will have 30 days to file their initial report. This final rule is one of three rulemakings planned to implement the CTA. Future rules are expected to establish rules for who may access BOI, for what purposes and what safeguards must be in place to secure the information and another revising FinCEN’s customer due diligence rule.

Who Must Report

The Final Rule applies to any foreign or domestic (a) corporation; (b) limited liability company; or (c) other entity that is created or registers to do business by the filing of a document with the secretary of state or any similar office under the law of a State or Indian Tribe.

There are 23 exemptions to the definition of a Reporting Company, including SEC reporting issuers, banks, credit unions, broker-dealers, businesses registered with FinCEN, tax-exempt entities, U.S. governmental authorities and large operating companies with more than 20 full-time employees in the U.S and more than $5 million in gross receipts or sales annually. Other exemptions are available for inactive entities, pooled investment vehicles operated by a qualifying sponsor, controlled subsidiaries, registered investment advisors and venture capital fund advisors that have filed required reports with the SEC.

The Final Rule specifically targets smaller entities for this additional disclosure.

What Must Be Reported.

In addition to certain identifying information, the Final Rule requires the reporting of information concerning both (1) beneficial owners; and (2) company applicants.

For each Reporting Company, the following information is required:

• Full legal name of reporting company
• Any trade or DBA name
• Business address
• Initial registration location; and
• Taxpayer or Employer Identification Number

For each Beneficial Owner or Company Applicant (see definitions below), the following information is required:

• Full legal name
• Birth date
• Current business address of Applicant
• Current residential address of Beneficial Owner
• Unique identifying number, issuing jurisdiction and image from:
  • Non-expired US or Foreign Passport
  • Non-expired government or tribal ID; or
  • Non-expired driver’s license.

This information will be reported to and stored within the Beneficial Ownership Secure System (BOSS), a non-public database developed by FinCen.  The information will be available to federal agencies in support of national security, intelligence, and federal, state, local and foreign law enforcement agencies in certain circumstances.

All reported information must be updated in a timely manner. Reporting companies and individuals may also apply to FinCEN for a “FinCEN Identifier,” a unique number that may be submitted to FinCEN in lieu of the above-described information. This will be particularly helpful to frequent filers, including Company Applicants.

Definitions.

The term “Company Applicant” means the individual who directly files the document that first creates or registers the Reporting Company and includes service providers and registered agent firms.

The term “Beneficial Owner” is defined as any individual (i.e., natural person) who, directly or indirectly (1) exercises substantial control over a reporting company; or (2) owns or controls at least 25% of the ownership interests of a reporting company.

The Final Rule’s definition of “substantial control” includes any individual who: (1) serves as a senior officer of a reporting company[2]; (2) has authority over the appointment or removal of any senior officer or a majority of the board; (3) directs, determines, or has substantial influence over important decisions made by a reporting company; or (4) has any other form of substantial control over a reporting company.

The Final Rule’s definition of “ownership interest” includes equity interests, capital or profits interests, convertible interests, options and “any other instrument, contract, arrangement, understanding, or mechanism used to establish ownership.” Ownership includes control through joint ownership with other persons, through a nominee, intermediary, custodian or agent and certain trust arrangements.

The Final Rule requires beneficial ownership reporting for every individual deemed to exercise substantial control over a reporting company and notes that substantial control may be exercised directly or indirectly, including as a trustee of a trust, membership on a board, rights associated with any financing arrangement, control over one or more intermediaries or financial, business, or other arrangements or understandings. The “substantial control” standard for beneficial ownership requires that even those who do not actually possess an ownership interest in a reporting entity will still be required to submit their information to FinCEN. Additionally, the inclusion of the “indirect” standard for substantial control denotes that all layers of beneficial ownership must be disclosed, if, for example, parent entities are used for ownership and management purposes.

Violations

The CTA provides that any willful violation of the reporting requirements can lead to civil penalties of up to $500 per day a violation has not been corrected; and criminal penalties of up to $10,000 and/or imprisonment of up to two years.

Recommendations.

Although existing entities have an almost two-year grace period to report, entities formed after January 1, 2024, will have to report immediately.  Clients considering new entities should understand the new reporting requirements and start identifying all reporting companies in their structures and gathering beneficial ownership information from Beneficial Owners and persons who exercise Substantial Control.  Investors whose personal information will have to be disclosed should be notified about the new rule and complex ownership structures, including family trusts and financing agreements, should be analyzed in order to determine the new reporting obligations.

If you would like more information, you can reach out to one of the attorneys at Milgrom & Daskam to review your business and ownership legal structures and help you prepare for the new reporting requirements.

[1] This post has discussed some, but not all of the provisions of the final rule.  Interested persons should review the rule which can be accessed at the link above or at 31 CFR 1010, Sec 1010.380 and in the Federal Register, 87 FT 59498.

[2] “Senior Officer” means any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer or any other officer, regardless of official title, who performs a similar function. Does not include ministerial roles with little control including “corporate secretary” or “treasurer.”